Mary Tolan's Modest Proposal A rising star at Accenture is advising Big Oil and the auto industry that they can revitalize the economy, mint profits, and save the planet--if they'll just learn to stop worrying and love hydrogen.

By Ralph King

June 1, 2003

(Business 2.0) – As the luncheon at the swank Miami resort begins, Mary Tolan takes a seat and braces herself. After weeks of frantic preparation, Tolan, a superstar at the big consulting firm Accenture, has just unveiled for a crowd of oil and energy executives a scheme to spark the bonanza of the century. All they have to do to get in on it is scrap the businesses they've spent their entire careers and huge amounts of capital building and start over.

What Tolan has proposed, over chicken penne and chocolate mousse, is a crash program to replace gasoline with hydrogen as the world's chief transportation fuel. It would cost money--several hundred billion dollars, actually--but as Tolan sees it, that's peanuts compared with the unprecedented economic boom and the gushers of corporate profits her hydrogen proposal would produce. Still, for this crowd, petroleum clubbers all, the message is hard to swallow. "This is a formula for disaster!" snorts the silver-haired gentleman lunching beside her, Patrick Daniel, chief executive of Enbridge, operator of the world's longest oil-pipeline network. "Private enterprise will never take a big leap like this. We'd lose our shirts."

Tolan listens, smiles, and gamely rebuts Daniel and several other energetic critics. As lunch winds down and the room empties, the 42-year-old consultant checks her hair in a mirror and observes with a sigh, "I hate conventional wisdom."

Conventional wisdom holds that nothing--short of maybe the spontaneous combustion of every oil field in the Middle East--will dislodge petroleum as the nation's lifeblood anytime soon. The economic and national security risks of oil addiction are accepted with a shrug and another call to fill 'er up. But Mary Tolan didn't get to be Accenture's highest-ranking woman, known in her industry for orchestrating fabled rescues of Best Buy and other seemingly lost-cause clients, by shying away from tough tasks. Now, backed by heavyweights like former Secretary of State George Shultz, she has begun to present corporate and political leaders with the first detailed, business-oriented blueprint for what she calls an "accelerated change" to the hydrogen age.

Under Tolan's pedal-to-the-metal scenario, the country could completely wean itself off imported oil by 2015 by flooding the market with fuel-cell vehicles. Most of the hydrogen needed to power the cars would come from plentiful North American natural gas piped to existing filling stations, then processed into hydrogen. Imagine: In little more than a decade, half the cars on American highways would run on clean-burning hydrogen costing 40 percent less per mile than gasoline. Yes, Tolan agrees, some unusual things would have to happen first: You'd need annual federal subsidies of $10 billion to $20 billion in the early years to make the cars affordable and to scale up production. Oil and gas companies and utilities would have to plow some $280 billion into hydrogen infrastructure in the United States alone. Press Tolan a little and she'll acknowledge that she's calling for a radical transformation that could expose some of the most hidebound industries in the world to daunting technological and commercial risks.

On the other hand, Tolan argues that the fast ramp to hydrogen would ultimately cost far less than the baby-step approach proposed by the Bush administration, which envisions spending just $340 million a year and postpones energy independence until 2040 at the earliest. More important for the crowd she is courting, Tolan says her approach, far from being devastatingly disruptive, would virtually guarantee stratospheric returns for the more nimble energy and automotive giants. Keenly attuned to the sensibilities of her audience, Tolan doesn't even mention the environmental benefit of vastly reduced greenhouse-gas emissions. "When people hear that, their eyes glaze over," she says.

Many glazed eyes greet the whole Tolan scenario, including those of some avid backers of hydrogen power. But before you dismiss her campaign as hopelessly quixotic, consider this: As head of Accenture's $2 billion energy consulting operation, one of the largest in the world, she has deep connections and serious cred in the industry. She has already picked up some unlikely converts. And throughout her career, Tolan has overcome corporate naysayers, smashing conventional thinking by the sheer force of carefully constructed arguments. This time she's recasting the stagnant hydrogen debate into a message that business can relate to--namely, that those who have the vision and the nerve to lead in the dawning hydrogen era could become what the likes of Rockefeller, Hunt, and Ford were to the oil age. Those who don't, Tolan says, should at the very least pipe down.

"The private sector needs to play ball and stop telling people it's a stupid idea from moment one," Tolan says.

Mary Tolan has always relished a good fight. Through many steamy Chicago summers, she and her six younger siblings battled their parents over putting in a swimming pool. The kids eventually won. Tolan earned her MBA at the University of Chicago, where she was noted for her classroom sparring with Nobel Prize-winning economics professors like the late Merton Miller. Even before she made partner at Accenture, she prodded risk-averse clients to adopt radical, often untested strategies like tearing apart and reconfiguring their factory floors. "Mary loves constructive conflict," says management guru Noel Tichy, who has studied some of Tolan's work.

She was in her element when Accenture dispatched her to electronics retailer Best Buy in 1997. The company's founder, Richard Schulze, was famously dismissive of consultants. Brought in on a narrow assignment, Tolan's team saw that Best Buy's pricing seemed totally irrational, and they huddled on nights and weekends to invent a radically new way to set prices. Tolan called it "shocker pricing"--price points on a few key items that would be so startling to buyers that they'd flock to stores even if the company did no advertising. Tolan told Schulze that Best Buy's net income would jump from break-even levels to $200 million within two years. Schulze's initial reaction: Yeah, right. But she made her case: Best Buy implemented the plan, profits soared, and Schulze has since hailed Accenture as his company's savior.

That and other successes vaulted Tolan to the top of Accenture's energy unit by June 2000. (The company also has long-standing relationships with the other main constituency targeted by Tolan's plan--automakers.) Last year, in the wake of the Enron debacle, the energy unit's revenues peaked, and Tolan needed new "value creation" ideas for clients. She assigned some of her own hotshots to plot a long-term investment strategy for cash-rich oil companies. After months of study, they made a case for hydrogen, and Tolan set out to make Accenture the authority on profiting from a hydrogen economy.

Such scenarios have circulated for years, of course. But Tolan and her team have in recent months created state-of-the-art analytical models that executives can use to explore the option in depth, work the numbers, and see that, as Tolan says, "there are few opportunities for innovation like this."

The speed of the transformation Tolan envisions makes Internet time seem glacial. Starting in 2005, automakers would introduce fuel-cell vehicles, ramping sales up sharply to 8 million units by 2009, with the help of at least $10 billion in annual subsidies to help defray the initial cost of about $40,000 per vehicle. (If $10 billion seems steep, Tolan counters that the Apollo space program at its peak ate $17 billion a year.) The ambitious scheme, Tolan calculates, would put about 115 million fuel-cell cars on the road by 2015.

To meet demand for hydrogen, oil companies would have to hustle to install hydrogen pumps at 30,000 filling stations, enough to supply cities conveniently. The handiest source of hydrogen in North America is natural gas--there are huge reserves in Canada and the Gulf of Mexico--and producers could link filling stations to existing pipelines quite readily. Other potential sources include ethanol and hydrogen extracted from water using electricity in areas where power is especially cheap. The result: U.S. oil consumption falls from a projected 28 million barrels a day to 6 million by 2020, eliminating the need for imports. That alone would save the nation about $200 billion a year--not to mention a lot of geopolitical headaches.

"That's a bigger prize, and a lot less risky, than putting a man on the moon," Tolan says.

How to persuade giant corporations to shoot for the moon? Tolan describes her approach as "the art of the possible," and indeed, she must bring to bear a master politician's persuasive powers. She starts by redefining the core problem and identifying a skyrocket business opportunity. She then races up the knowledge curve, gathering "irrefutable evidence" for her case. On the way up, she frequently has to debunk "bogeyman" notions, such as one oil-industry estimate that it will cost as much as $500 billion just to convert filling stations to hydrogen. Tolan's estimate is $130 billion.

Tolan says she learned a lot about attacking the status quo by watching people like former New York mayor Rudy Giuliani. Giuliani reversed decades of civic decay by focusing single-mindedly on crime. Swift strides on that front spurred progress in other areas like homelessness, helping to restore the city's vitality. Tolan realized that the many facets of petroleum addiction--the powerful oil industry's vested interest, the potentially costly but remote environmental threat, the chicken-and-egg question of how to create a new fuel supply and launch a revolutionary vehicle at the same time--all invite paralysis. "You can't tell companies what to do," Tolan says. "But you can take something that's never been an issue and make it the issue."

The issue, in Tolan's case to the oil giants, is the industry's undeniable need to invest rapidly accumulating billions in something that will sharply boost profitability in the not-so-distant future. Big oil companies, Tolan says, "have exhausted their typical ways of spending." The days of oil megamergers are probably over, and replacing petroleum reserves costs so much that it makes less and less economic sense. Since 1996, in fact, industry leader ExxonMobil has found no better use for some $20 billion than to buy back its own stock.

Moreover, Tolan believes, the costs of creating a hydrogen industry, while considerable, are far lower than critics contend: $280 billion in the United States for hydrogen production and infrastructure. Her estimate includes $70 billion to crank up the natural-gas and ethanol supply, $40 billion to lay new pipelines, $40 billion to transport fuel to filling stations (via pipelines or trucks), and the $130 billion to retrofit filling sites. The scale of investment is in line with what major oil companies already spend on petroleum exploration and production. ExxonMobil, for instance, budgeted $100 billion for that purpose this decade.

The payoff on making those hydrogen bets is potentially immense, in Tolan's view. Hydrogen producers would be in the enviable position of creating a vast commodity market from scratch. It turns out that hydrogen is relatively cheap to extract from natural gas; that gives it a built-in 40 percent cost advantage over gasoline--3 cents per mile vs. 5 cents, Tolan estimates. Oil companies' leftover reserves could prove even more valuable than they are today: With little need to turn that oil into gasoline, companies could use it for higher-margin petrochemicals and specialty fuels. Tolan projects that hydrogen investment returns could far outstrip the current 11 percent average ROI in petroleum businesses.

Tantalizing prospects also exist outside the oil industry. Gas and electrical utilities could compete in transportation for the first time, setting up retail filling stations of their own. In addition, a nationwide fleet of fuel-cell cars offers a new vista in power generation. The electricity output of 12 million hydrogen fuel-cell vehicles--about 10 percent of the U.S. total Tolan projects by 2015--would equal that of all of today's power plants. Tolan sees urban "power parks," where cars produce juice for the grid during the workday, as a low-cost alternative to peak-demand power plants.

Besides, the technology risks involved are smaller than many people realize, Tolan insists. The big fuel-cell breakthroughs have already occurred, she says. The race now, at places like GM, Toyota, and Ballard Power Systems, is to cut material costs and extend engine life. At present, the per-mile operating cost of a fuel-cell car is 45 cents, compared with 22 cents for the average internal-combustion car. Tolan thinks 10 cents per mile for hydrogen cars is possible over time as technological advances drive costs down.

"It's just a function of effort and investment," Tolan says. "This is not like trying to find a cure for cancer."

Critics find much to dislike in Tolan's scenario. Chris de Koning, a spokesman for Royal Dutch/Shell, considered the industry's biggest hydrogen booster, says the heavy government involvement in Tolan's accelerated plan would lead to disastrous mismanagement. He cites the billions of dollars blown by the federal "synfuels" program in the 1970s. "If you subsidize the hydrogen shift too heavily in the early years, you could kill it," he says. John Felmy, chief economist at the American Petroleum Institute, an industry trade group, says Tolan's scenario underesti-mates the cost of a hydrogen refueling infrastructure by a factor of 10. He gives it a "1 percent chance of success--at best." A Department of Energy spokesman says the agency is familiar with Tolan's ideas but won't comment on them specifically. As for the massive subsidies Tolan's scenario requires, Greg Dana, an official at the Alliance of Automobile Manufacturers, speaks for much of the industry: "Do you really think the federal government would do that?" he asks, laughing heartily.

Even some environmentalists attack Tolan, in part because her plan's initial reliance on fossil fuels rather than renewable sources for hydrogen means a lot of greenhouse gases would still be spewed into the air. (They also fear that the plan would just replace Big Oil with Big Hydrogen, keeping the same cast of environmentally suspect characters in control of the new industry.)

Still, Tolan has a history of overcoming skeptics, and in just a few months of making her pitch, she already has some significant supporters. One is Larry Bell, chairman of BC Hydro, the largest utility in British Columbia. "We've got to put a man on the moon," Bell says, using a Tolan metaphor for a quick shot to hydrogen. "I consider it a very laudable goal." Another is George Shultz, who's not only a member of the Republican establishment, but also a former president of Bechtel, one of the world's largest builders of pipelines and power plants. He agreed to chair Tolan's 20-member advisory board. "The world is shifting gears," he says. Tolan's work can "help catalyze needed change."

Just as significant, some influential people in the oil patch and government posts are at least hearing her out. Last February in Houston, at one of the biggest energy conferences of the year, Tolan presented her scenario to 2,000 industry executives. "She got a lot of pooh-poohs," says Joseph Stanislaw, president of Cambridge Energy Research Associates, the conference sponsor. "But a lot of folks also said they know they've got to start thinking this way. Once you have first movers and quick followers, things can go very fast." He says that none of the big oil companies has committed significant capital to hydrogen, but all are studying safety, feasibility, and cost.

At the Houston conference, Tolan told Vicky Bailey, a DOE assistant secretary, that the Bush administration's underfunded hydrogen program sends a clear signal to the private sector: Sit back and do nothing. What would it take, Bailey asked, to spark action? At least $10 billion a year, Tolan replied. That's 30 times the current funding. Bailey just smiled, Tolan recalls.

Indeed, conventional wisdom holds that George W. Bush, former oilman, could never be persuaded to pony up that kind of money for hydrogen. That's just the sort of challenge Mary Tolan can't resist.